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Expected Profit Expected Employee Surplus Expected Total Surplus Unobservable Effort and Variable Wage Contract Suppose the firm could not observe or monitor employee effort. d) If the firm continued to pay the fixed wage determined in part b), what would expected profits, employee surplus and expected total surplus be? Fill in the table. Expected Profit Expected Employee Surplus Expected Total Surplus Suppose the wage contract was contingent on revenues that are realized after the employee has exerted effort. Let wyw' be the high and low wage respectively. e) Describe the participation constraint that this contract should satisfy to make the employee accept the employment offer. 1) What is the incentive constraint that will induce the employee to exert high effort? Assume that both the incentive and participation constraints hold with equality. 9) What is the optimal variable wage contract, w/w that induces high effort from the employee? Fixed Compensation and Risk Aversion h) Suppose the manager were risk averse instead. Describe how the participation constraint will change in parte). ) What role can a fixed wage compensation for the manager play in this case? Expected Profit Expected Employee Surplus Expected Total Surplus Unobservable Effort and Variable Wage Contract Suppose the firm could not observe or monitor employee effort. d) If the firm continued to pay the fixed wage determined in part b), what would expected profits, employee surplus and expected total surplus be? Fill in the table. Expected Profit Expected Employee Surplus Expected Total Surplus Suppose the wage contract was contingent on revenues that are realized after the employee has exerted effort. Let wyw' be the high and low wage respectively. e) Describe the participation constraint that this contract should satisfy to make the employee accept the employment offer. 1) What is the incentive constraint that will induce the employee to exert high effort? Assume that both the incentive and participation constraints hold with equality. 9) What is the optimal variable wage contract, w/w that induces high effort from the employee? Fixed Compensation and Risk Aversion h) Suppose the manager were risk averse instead. Describe how the participation constraint will change in parte). ) What role can a fixed wage compensation for the manager play in this case